Good day. And welcome to the EFSC Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Lally, President and CEO. Please go ahead. .
Well, thank you Cristina. And good morning, and welcome to our first quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is Keene Turner, our company's Chief Financial and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.
Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday.
Please refer to slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make this morning. Please turn to slide 3 for our financial highlights for the first quarter.
On our fourth quarter earnings call, I commented that our expected momentum we had leaving 2021 would continue to 2022. Our results for the first quarter of 2022 showed this to be true. For the quarter EFSC earned $48 million or $1.23 per diluted share.
This compared to $1.33 and $0.96 per diluted share for the linked and prior year quarters, respectively. This level of performance produced a return on average assets of 1.42% just slightly less than the 1.52% that we posted for the fourth quarter of 2021.
As you know the fourth quarter typically has the benefit of the peak of non-interest revenue and 2021 was no different. On a pre-provision basis we earned $57 million for the quarter yielding a robust PPNR ROAA of 1.7% and an ROATCE of 17.5%. EFSC posted another solid growth quarter for both loans and deposits.
Net of PPP loans grew at an annualized rate of 8%. Scott will provide much more detail about where we saw opportunities and where we experienced headwinds, but I will comment that we remain disciplined with respect to pricing and credit likely to the detriment of a few additional basis points of growth in the quarter.
Nonetheless, I am confident about our ability to improve on this level of performance as we progress through the remainder of 2022. The quarter also provided a continued significant deposit growth for our company.
We are becoming increasingly comfortable with the diversified channels of deposit generation that we have added to our company over the last five years.
Just in the last year we have been able to grow our overall deposit base by 40% through organic growth and M&A while both improving our DDA to total deposit ratio to 42% and lowering our overall cost of deposits to 10 basis points.
This combination of an asset base that is interest rate sensitive combined with diversified well-priced deposit base will bode well over the next several quarters given the expected interest rate environment. Credit quality remained very solid as evidenced by the statistics on this page.
As I've mentioned in the past, we do not take this for granted and have worked incredibly hard to build a more diverse and resilient portfolio. Due to the improvement in our credit quality and macroeconomic forecasts, a provision benefit of $4 million was recorded in the first quarter of 2022.
Our capital position remains strong at 03/31/22, we had total shareholders' equity of $1.5 billion and a TCE to total assets ratio of 7.6% compared to 8.1% at 12/31/21. During the quarter, we repurchased 351,000 shares and increased the quarterly dividend 5% to $0.22 per share.
Stepping back and looking at the last several quarters you begin to see the cadence of consistency that we've worked hard to establish.
This includes solid loan growth in the high single digits, confidence in our multifaceted reliable and low-cost deposit generation capabilities, a top quartile return profile, a high-quality diversified loan portfolio and a flexible and efficient capital base. Moving on to slide 4, you will see where we remain focused for the remainder of 2022.
As we progress through the second quarter, we have our teams keenly focused on their loan deposit and net new relationship goals for 2022.
We designed the business in a diversified way to rely on multiple markets and businesses such that we can focus our efforts on the families and businesses that truly value our relationship and solution-oriented model versus garnering growth at any cost.
Like with past, new markets' tax credit allocations we are leveraging this to garner new relationships. We have found this especially true when we entered new markets where the use of the program is not as prolific or to differentiate ourselves in a very crowded commercial real estate business.
I'm excited to share with you that I'm already seeing new opportunities added to our pipeline using this tool. As it relates to our affordable housing business, we are seeing growth in existing and in new markets that should build on our 2021 performance which was a record year in terms of closings.
We have made significant progress in expanding our profile to attract new talent. We've invested more heavily in talent, for current and new specialty businesses along with bolstering our teams in higher-growth markets. Our recent recruiting efforts in the Orange County and L.A.
markets complement our existing team and will introduce us to more middle-market operating businesses. The four most recent hires came from four different organizations and have hit the ground running. In his comments, Scott will provide a little more detail around the most recent trends we are seeing in these markets.
However the progress and early signs are positive. And I'm excited to continue to expand our profile throughout Southern California and the Southwest. Additionally, in the fourth quarter of 2021, we were able to onboard a professional practice finance team.
With a national focus this group, has come out of the gates very well in 2022 and begin with shared high expectations. We've also bolstered our already high-performing Phoenix team with three new adds each coming out of different organizations. Finally, we recently announced the opening of a new commercial office in North Texas.
We were able to land a proven leader and will build around his 30-year career in this very attractive market. We are eager to make these investments and we're confident that these new associates and teams will add to our current and expected level of growth. With that, I will now turn the call over to Scott Goodman.
Scott?.
Thank you, Jim, and good morning, everybody. As Jim had mentioned, we're out of the gates well in 2022 with loan growth for the quarter of $176 million net of PPP or 8% annualized as represented on slide number 5.
In general, the specialty business units continue to perform well, with additional growth contributed from the commercial real estate activity in the southwestern region driven in large part by Arizona. The loan details by segment are outlined on slides number 6 and 7.
On a TTM basis organic loan growth net of PPP and net of the recent First Choice acquisition was $770 million or 12% with nearly all key areas of the loan portfolio showing the increases.
As you heard from Jim, we've remained disciplined in our pricing philosophies relating to the fixed rate portion of our business, as competitive pressures push spreads well below our targets.
And while this did dampen some growth in the investor CRE book over the past year, we see longer-term value in maintaining consistency and transparency in our loan process both with clients and with our sales teams.
That said we've been able to lean into other channels that were more immune to the environmental headwinds and competitive pressures to provide the growth and improved returns proving the fundamental benefit of our diversified revenue model.
In recent calls I've talked about the robust activity in our Sponsor Finance business being driven by a strong M&A market and the deep relationships that we've nurtured with our private equity partners through the years in this line of business. As a result, Sponsor Finance posted record growth of $133 million in the quarter.
This does not signal any changes to our strategy as our approach to credit structure to pricing with our targeted sponsors remains consistent. Although, the net growth may vary quarter-to-quarter based on seasonality and the timing of portfolio company sales, the production activity remains strong in this business.
Solid growth in life insurance premium finance mainly reflects several new clients as well as seasonal premium payments on existing policies. As the aggregate portfolio has steadily built a funding sale on its annual premiums that naturally adds elevated quarterly growth momentum.
The tax credit business also continues to perform well with new fundings related to the expansion of affordable housing programs across multiple states. In the SBA business, production remained solid and consistent with prior Q1 levels. The payoffs and pay-downs have risen somewhat due to competitive pressures from non-SBA lenders.
We're executing plans to proactively address improved retention of the well-seasoned loans as well as continuing to recruit new originators to boost production in higher growth markets. Aggregate portfolio trends in specialty lending along with the local markets are outlined on slide number eight.
In addition to the aforementioned specialties, we've also added a small experienced team of experts located in California, dedicated to the professional practice space. This group focuses on lending to dental, veterinary and small medical practices and is off to a nice start adding $18 million of growth in the quarter.
The southwest region which includes Arizona and Las Vegas, continues to post strong growth in Q1 of $70 million, and has grown $182 million or 42% year-over-year.
Larger originations during the quarter have been composed of new CRE acquisition and development deals for existing relationships, for which we can leverage our proven ability to perform and obtaining targeted yields. In St. Louis the portfolio was up approximately 2% year-over-year but declined slightly during the quarter. St.
Louis includes a large base of C&I clients, whose working capital borrowing needs have been suppressed by the larger cash balances and continued supply chain obstacles. After a slight uptick at fiscal year-end, average line usage leveled off during Q1 at around 40% of total commitments.
Fundamental sales indicators though remain positive with healthy new origination levels, additional new relationships and a four-quarter low in terms of payoffs. And I expect that as liquidity continues to work its way through the system that these activities will ultimately result in better net growth in the market.
Kansas City loans were up $21 million in the quarter or 10.8% annualized with a balanced mix of new C&I and CRE loans in the various industries, including logistics, foodservice, broadcasting and metal fabrication. In general, the Kansas City team is producing steady originations.
In New Mexico, we've experienced a decline in loan balances over the past year. As a reminder, we entered New Mexico market through the LANB acquisition into three primary submarkets of Los Alamos Santa Fe and Albuquerque.
The primary value driver was and continues to be the low-cost and well-diversified deposit book, which is primarily concentrated in Los Alamos and Santa Fe. We've successfully grown this deposit base while maintaining its low-cost profile as well as developed some nice commercial relationships in these communities.
Albuquerque, however, makes up the predominant share of loan balances from New Mexico with a heavy commercial real estate portfolio. Our goal in Albuquerque has been to maximize retention of loans that fit the Enterprise Bank & Trust client profile while developing a C&I strategy similar to our other markets.
Certainly the COVID and related economic factors have impacted our ability to achieve these goals as quickly as expected, but we also felt that a leadership change was necessary here to better position us going forward.
This change was made during the quarter with the promotion of an existing high performer as well as repositioning this region under the leadership of our senior team in Arizona. Our expectation here is to slow the runoff near term, and build a well-balanced relationship-based loan portfolio with modest but steady growth potential over time.
We continue to execute our integration plans for the legacy First Choice and Seacoast Commerce local commercial loan books in Southern California.
As I discussed last quarter, the primary objectives were to retain and deepen key client relationships, maintain a steady production process and expand our talent base to support the expansion of our C&I strategy into this market.
In Q4, I also set the expectation that near term, we would see some pressure on net growth extending from a portion of the legacy bank book, which was focused on shorter-duration CRE bridge lending and residential fix and flip loans. We did continue to experience this pressure in Q1.
However, we are getting traction on our longer-term objectives and the quarterly trends are positive. Relative to the loan portfolio here, originations were up in Southern California by 25% over Q4, while payoffs declined by 46% over the same period.
Our loan pipeline has also been building nicely, including both opportunities to expand exposure with legacy clients, as well as new CRE and C&I relationships. On the talent front, we're also making solid progress.
In addition to the relocation of a long-term proven senior leader within the Enterprise organization to integrate with the commercial team in L.A. and Orange County, we've also recruited four new C&I-focused relationship managers from several end market competitors.
We expect these experienced bankers to help expand our reach into the networks and the COIs necessary which reduce C&I growth into the region.
Expanding a bit on Jim's remarks in a challenging environment for talent, our new adds in the existing markets of Southern California and Phoenix, as well as the new team in North Texas, provide solid opportunities to leverage the higher economic growth profile of these metro areas and support the attractiveness of our business model to the experience -- to these experienced commercial bankers.
Finally, touching on deposits from slide number nine. Total deposit balances ending Q1 were up $360 million from Q4 to $11.7 billion, driven by ongoing liquidity within our commercial client base. Steady consumer saving levels also continued particularly in New Mexico and continued growth of specialty deposit lines.
The specialized deposit teams for community associations and the third-party escrow business also produced steady new accounts for our key existing relationships as well as onboarded several new relationships in the quarter.
In general, new accounts continue to outpace closed accounts and we're well prepared to maintain a disciplined approach to pricing both new and existing balances.
For now we have not experienced significant attrition of balances due to rate for our relationships, but we continue to watch this closely through further Fed interest rate moves albeit with a disciplined and relationship-focused approach. Now, I'd like to turn the call over to Keene Turner for further comments.
Keene?.
Yes. Thanks, Scott and good morning everyone. My comments begin on slide 10 where we reported earnings per share of $1.23 on net income of $48 million in the first quarter compared to $1.33 in the fourth quarter.
The loan and deposit growth that Scott discussed benefited net interest income and helped offset the impact of the decrease in PPP earnings and the two fewer days in the quarter. Non-interest income is typically highest in the fourth quarter of each year and we experienced the expected seasonal decline in the first quarter.
We also declared and paid our first dividend on our preferred stock this quarter and that reduced earnings per share by $0.03 in the period. And lastly our continued management of capital through share repurchases added approximately $0.01 to earnings per share in the quarter. Turning to slide 11.
Net interest income was $101 million compared to $102 million in the prior quarter. The decrease was primarily driven by a $2 million reduction in PPP-related income along with the two fewer days in the period.
Despite the sequential decline, we continue to build repeatable net interest income with strong organic loan growth, higher earnings in the investment portfolio and stable net interest margin. Moving on to slide 12. Net interest margin on a tax equivalent basis declined four basis points in the first quarter to 3.28%.
This was mainly the result of higher average balances on interest-bearing cash stemming from the strong deposit growth in both current period and the prior quarter.
Loan yields were higher by two basis points despite a $170 million reduction in average PPP balances and we continued to add to the investment portfolio at a measured pace to deploy excess cash and take advantage of higher available yields. Funding costs were stable as our total cost of deposits remained at just 10 basis points.
We anticipate that net interest margin and net interest income will expand now that rates are moving higher.
Our balance sheet remains asset sensitive and we expect that each 50 basis point increase in interest rates will result in an additional 3% to 4% increase in net interest income dollars on an annual basis, which is approximately 8 to 12 basis points of net interest margin based on 3/31 asset composition.
The loan portfolio is our largest driver of asset sensitivity at 63% of loans are variable rate. Nearly 60% of those have rate floors and approximately 40% with floors are currently priced at or above the floor. The additional 20% are within 50 basis points of the floor.
The high level of cash on the balance sheet and continued deployment with investment yields up helps us to mitigate the impact of those floors and make the lift off of low interest rates more meaningful.
Our deposit portfolio remains more than 40% non-interest-bearing balances and we have less than $500 million of total transaction accounts formally tied to an index.
With ample liquidity, our expanded footprint and strong low-cost deposit generation through our specialty verticals, we believe our ability to control deposit costs as rates rise is greatly enhanced versus prior tightening cycles. Slide 13 depicts our asset quality, which showed continued improvement on an already strong position.
Non-performing assets were $23 million or 17 basis points of total assets. Net charge-offs were $1.5 million or 7 basis points annualized compared to 14 basis points in the fourth quarter.
On Slide 14 we reduced the allowance for credit losses with a $4 million provision benefit in the first quarter, due to improvement in our credit quality metrics, forecasted macroeconomic factors, most notably unemployment rates and the commercial real estate price index.
The allowance for credit losses totaled $139 million or 1.54% of total loans compared to 1.61% at the end of the year. Excluding guaranteed loans, the allowance of total loans was 1.73% at March 31.
While our forecast improved in the quarter, we do believe the existing level of allowance reflects heightened risk to the economy from inflation, rising interest rates and continued disruptions in the supply chains that warrant ongoing consideration. On Slide 15, fee income for the first quarter started out strong at $19 million.
This was a decline of $4 million compared to our seasonally high fourth quarter result of $23 million. The decline was led primarily by reduced fees earned on community development investments and reduced tax credit income that was consistent with our expectations.
Card services revenue declined, as debit card volumes decreased in the first quarter compared to fourth quarter levels. Swap revenue was strong in the first quarter at $1 million and deposit service charges rebounded in the first quarter, as the fourth quarter included a fee holiday provided to First Choice customers during core system conversion.
While tax credit income will continue to be seasonal, our momentum in this business line continues. However, rising interest rates do pressure this line item due to its impact on the inventory held at fair value.
Also, fees earned on community development investments are not consistent sources of income quarterly, but we do expect continued contribution in the latter part of this year. Card services will face the Durbin impact headwind starting in the third quarter of around $750,000 per quarter. Turning to Slide 16.
First quarter total non-interest expense was $62.8 million, which is roughly $1 million lower than the fourth quarter, which included $2.3 million of merger-related expenses. There were no merger-related expenses in the first quarter.
Core operating expenses were $1.4 million higher in the first quarter at $62.8 million compared to $61.4 million in the fourth quarter. The driver of this increase was primarily seasonally higher payroll taxes and along with the 401(k) match.
Expenses for 2022 have performed as expected and we're encouraged by the numerous positive business trends to begin this year. As both Jim and Scott discussed, we continue to invest in our markets and have successfully recruited new production associates in both our commercial and specialty lines.
These investments will allow us to build and strengthen our growth targets, but we do expect to see a sequential increase in our expense run rate from the first to the second quarter.
Specifically, hires in commercial banking units will allow us to build upon the current growth rate for loans and more confidently maintain that rate of growth over a sustained period.
Additionally, stronger than planned momentum in specialty deposit areas, as well as forecasted net interest rate trends has and will drive continued servicing expenses.
As a result, it appears that the current quarterly run rate will step up modestly from roughly $63 million per quarter to a range of $64 million to $66 million for the remaining quarters in 2022.
To reiterate, these trends will -- we expect these trends will be more than offset by net interest margin trends, but more importantly we think these investments in continued growth will allow for stronger revenue trends longer term. Our capital metrics are demonstrated on Slide 17.
Our tangible book value per share was $27.06 and our tangible common equity to tangible assets ratio was 7.6%. This compares to $28.28 and 8.1% at the end of the year.
The 4% linked quarter decrease was primarily due to a decline in accumulated other comprehensive income due to the impact of rising interest rates on our available-for-sale investment portfolio.
We currently have 28% of our investment portfolio held in maturity including more than $100 million we transferred early in the first quarter to protect tangible book value further from rising rates.
It's important to note that the decrease in the fair value of the portfolio does not impact earnings or our regulatory capital ratios where we continue to have excess capacity over well-capitalized limits.
With a strong capital position and equity market trends, we repurchased over 350,000 common shares, totaling $17 million in the first quarter and announced another increase to our quarterly dividend.
We returned approximately $25 million to shareholders this quarter through repurchases and common dividends, while our earnings drove a 17% return on tangible common equity. We had a strong start to the year and with solid loan and deposit growth high-quality credit metrics and continued deployment of excess liquidity.
These highlights drove a 1.4% return on average assets and a pre-provision return on average assets of 1.7%. We believe we are well positioned for the remainder of 2022 and to continue to execute on our strategic initiatives. Thanks for joining the call today and we're going to now open the line for analyst questions. .
Our first question from Jeff Rulis with D.A. Davidson. .
Thanks. Good morning, all. .
Good morning, Jeff..
Question on the expenses. I appreciate the guidance there.
Just wanted to confirm the cost saves on the deals have that completely been captured at this point?.
Yes Jeff. We have actually and I would say on the First Choice side, probably more so and as you heard from Scott some redeployment on that front as we move forward. But we feel like from a net run rate there we're in good shape.
And in fact at the end of the year we had a retirement and a planned transition of the SBA team from Dave Bartram to Rick Visser and so that concluded the final cost saves, as we see it from the Seacoast merger. So, we're in good shape there. I think it's a clean run rate from here on out so to speak. .
Got it. And then moving to the funding side and this is a little more maybe detail. Trying to get a sense for the specialty funding versus your traditional funding sources.
What is the typical betas or what would you broadly speaking view what betas -- how that would translate to the specialty group versus the traditional or perhaps there's not much of a difference?.
So, Jeff in the guidance that I gave on the margin impact on the static balance sheet, we've essentially modeled on interest-bearing accounts the same betas we had in the last cycle which was around 75%. We think that with the deposit composition I mean we've more than doubled DDA with some of the transactions we've done.
And the specialty specifically, I think overall that will help control deposit costs and I think it will help us control that noninterest or that interest-bearing piece more favorably. And then in addition the savings accounts and particularly in New Mexico will also help drive that beta further down.
So, we think our guidance is fairly conservative there. And then there is an expense component to some of the specialty businesses. In 2021 that was around $14 million of run rate expense. In the first quarter that's roughly $4.5 million that's running through other expenses. And we think that that steps up to around $5 million in the second quarter.
And then from there on out it's going to be a function of growth and some impact of rising interest rates on those balances. But we think that's about 20% to 30% in terms of if you look at it from a beta perspective on the overall balances. That's what we're seeing from prior research on the big players in those markets.
And that's essentially what we're modeling and signaling to our teams in terms of our tolerance for moving forward. So I think we feel well-positioned there. And again I think our guidance in that 3% to 4% for 50 basis points is conservative to a degree. And we're going to manage that to be a little bit better than we've been in the past. .
So Keene if I -- correct me if I'm wrong here the kind of the betas on the specialty you sort of, diverted that to -- it's actually an operating expense type growth versus impact of traditional margin betas? Is that did I hear that correct?.
Yes, that's generally correct. So within my comments there is some money market component and interest-bearing component that I've lumped into what I talked about in terms of the overall deposit betas. But then it's that high DDA that really is a pass-through.
And we're funding and paying certain expenses for those accounts, but it's reflecting as DDA and we're also drawing fees on it. And so those dollars that I gave and the sensitivity that I gave really reflects those expenses and non-interest income and is also part of what's driving the slightly higher guide on the expense side. .
Got it. Perfect. Thank you. Maybe last one. Just heading back to the buyback the pace this quarter. If you match that, I guess, you'd almost be at the end of the authorization. I just if you could comment on the appetite on buyback.
And Jim I guess any other you could round that out with any kind of M&A discussions that the appetite there as well?.
Sure.
Keene you want to touch on the buyback first?.
Yes, Jeff, I'd say that your comment about the assumption of that continuing to roll forward with market trends is fairly accurate and we're close to the end of the existing authorization. We're in the time frame where we come out of year end planning and we're working through our capital plan.
And I would anticipate that barring M&A or outsized growth our dividend posture sort of remains similar and we would use the share repurchase to fill in the gaps there so from a capital management perspective.
The only caveat is with rates continuing to trend a little bit higher we're just going to be mindful of TCE levels and the impact of the available-for-sale portfolio on TCE levels.
But we have that extra layer of Tier 1 capital from the 2021 preferred issuance that gives us more confidence to run down at this level we'll say slightly below 8% if necessary given market weakness. So our posture in terms of capital management remains very much the same and we haven't pivoted. .
And Jeff, I'll just comment on M&A. We think about it in multiple ways. We did a little bit relative to onboarding new teams and specialties. That's one way to look at it.
From a whole bank perspective as you know it's a process and we're focused on being able to fill in where we possibly have needs in certain markets and talent and things of that nature as we look at possible partners and things of that nature. .
Thank you..
And we'll take our next question from Andrew Liesch with Piper Sandler. .
Hi. Good morning, everyone..
Good morning..
I appreciate the commentary around the margin and obviously rates moving higher.
Can you give us a sense on what new yield -- what loans are being added versus I guess last quarter and relative to the portfolio average?.
Yes. So Andrew for us it always depends on where the growth is. Growth this quarter was in particular in senior debt financing so that helped drive rates up just slightly. So we're at 4.34% total loan yield at the end of the quarter.
Those rates are going to be just modestly higher than that; SBA similarly and then premium finance and some of the other more credit-immune disciplines are going to be below that. So it's a function of where that growth is coming.
And Scott or Jim can comment, but I think they made this comment that, our spread appetite hasn't changed and we're being disciplined in terms of how we're quoting loan rates.
And so, its cut in the growth a little bit, because we feel like we've been better in terms of pricing on what is a moving interest rate curve and quoting spreads over the index versus generally a flat rate. So we're still trying to maintain our spreads in variable rate loans and keep that high variable composition. So, hopefully that's helpful.
We try not to give away too many direct secrets there. But safe to say, I think the premiums above certain areas and below for credit characteristics generally remain intact. And the growth in the quarter is really reflective of our continued pricing discipline..
Andrew we had opportunities and you know the market as well that there is demand out there for longer-term fixed rate financing especially tied to certain real estate markets.
We just chose that for the longer term it's not what we wanted to do, right? And we feel that there's a bit of transactional and commodity related to some of those opportunities that they'll circle back maybe a different name maybe a different project, but it'll circle back certainly and we'll capture it at a better yield for all of us..
Got it. So I'm just reading through that that's kind of what may have driven the decline in loans in St.
Louis and maybe I guess, slower pace of growth than any other quarter in Kansas City?.
Well, in certain sections right. Go ahead, Scott..
I was just going to say, I think St. Louis is more a factor of the C&I headwinds. Although, I would say just as Jim said, we did back away from CRE opportunities in all markets probably a larger impact in the higher growth markets for CRE. I think St.
Louis, maybe to a lesser extent Kansas City still seeing some of the headwinds on the liquidity that's sitting on the balance sheets of our C&I borrowers. I think that was more the headwind there..
Okay, got it. Thanks for taking the questions. I'll step back..
Thank you, Andrew..
We'll take our next question from Damon DelMonte with KBW..
Hey. Good morning guys. Hope everybody's doing well today.
First question just regarding credit and kind of the outlook there when we think about the provision, do you guys feel like you have additional capacity to release reserves, or do you feel like given the last couple of quarters of releases you've kind of right-sized or normalized the loan loss reserve?.
Scott, do you want to talk about credit?.
Damon, I think our posture there is we feel like we've been appropriately slow in reducing coverage because of the uncertainty from quarter-to-quarter remains that it shifts in terms of what the topic is and it's been moving fairly quickly. So, based on CECL and its forward look right now we think the allowance level is appropriate.
When we adopted CECL we were at basically 1.3% of loans. Our view of that is probably a little bit more conservative as we sit here today. And we've got all these economic factors that we probably weren't appropriately weighting in the initial adoption so to speak, because they haven't been prevalent for a number of years.
But with that said, credit quality continues to be on the upswing in terms of improvement from already high levels.
And so, there might be some work moving forward that it will come down, either as a function of growth depending on where asset classes we originate in or continued behavior or movement of credits that are driving some of the heavier reserve. But generally, I think based on CECL we feel like at 3/31 we have the appropriate allowance.
And there's probably not what I would call, a material move either way as we sat there if there was we would have had to recognize that in the first quarter..
Got it, okay.
So we should -- it's probably fair then to start to expect some modest provisioning here in the upcoming quarters?.
Yeah. I think all else being equal it's probably going to drive some provision. Like I said, unless we see some movement in credits that are carrying stronger reserves or just shifts in asset classes, for example, growth in SBA offset by declination in areas that we've got a little bit higher reserve, would cause some mixing and shifting around.
Life insurance premium finance is another allowance category that carries a fairly light reserve. So, just in full disclosure there..
Got it, okay. That's helpful.
And then, could you just talk a little bit more about the Sponsor’s finance growth this quarter and kind of it was pretty outsized? But can you just talk a little bit about some of the characteristics that resulted in that growth during the quarter?.
Sure, Damon. I can cover that. As I said, we've been in this business a long time now and we've built some pretty deep relationships. I think even going back to PPP where we were able to help many of those sponsors, because a large majority, are formed under the SBIC program of the SBA. We just generated a lot of goodwill with those sponsors.
And so, we're -- if we weren't at the top of the list we are now. And I think just the robust activity you're seeing in M&A and a lot of these funds -- these sponsors have raised new funds as well, so they're deploying capital. So, I think it's just a function of a lot of things coming together our longevity in the business.
We have an active sponsor base and we're just reaping the benefits of that right now. And we've been in the business for a while and so we've seen it. It can ebb and flow with cycles and we're taking advantage of it. We're not changing credit parameters. We're being disciplined with our underwriting and with our pricing.
So, I feel good about the quality of what we've added and we're just going to continue to take advantage of that opportunity while it exists..
Got it, okay. That's helpful. Thank you.
And then I guess just lastly, maybe Keene, can you just kind of revisit your commentary on non-interest income and the outlook going forward just given some of the items that may or may not have influenced this quarter's results? Just kind of looking for a bit of a projection to expect over the next three quarters. Thank you..
Yeah. I don't think -- I think we've got Durbin impact nailed down. I think we talked a little bit about the private equity. I would say, in total for 2022, we haven't really adjusted our expectations upward or downward. I think the quarters in which it's going to occur are different, particularly in tax credit.
So we could see lighter than expected second and third quarter, more so due to re-measurement and evaluation. And if it is possible that if the activity in that segment slows a little bit, we might even see a couple of negatives in the upcoming quarters with rates up and having the value of the tax credits lower.
But, we feel like with the first quarter performance and what we expect for third and fourth quarter, we'll be able to achieve the targets that we have pretty handily for the year and still meet the guide that was out there for that line item..
Okay, great. Thank you very much..
You’re welcome..
And we'll take our next question from Brian Martin with Janney Montgomery..
Hey, good morning, everyone..
Good morning, Brian..
Just a follow-up to the last question. Just the tax credit guidance, the initial guide for the year Keene.
Can you remind us what that was?.
I think it was around $10 million. Let me just make sure that's accurate in my notes. But I think we're expecting around $10 million in total for that, which is up 20-ish percent from 2021..
Okay. So 20% growth, okay.
And then, just your outlook for, I guess, just kind of you guys think about it with kind of your rate outlook as you think about it, I guess, how are you thinking about the rate increases here?.
Yeah. Brian, I think we're preparing for what we think is the most likely forecast that's out there, which is to near-term 50 basis point hikes. I don't know that we're thinking about a heck of a lot after that, because that's going to affect 2023 more than it affects 2022 from an earnings perspective.
It probably affects the way we manage and price deposits and gather them than it does the P&L, so to speak in the near term. But I think that's pretty much what we thought about in terms of how we prepared our guidance here and prepared our expense guidance from those revisions..
Got you, okay. And then just maybe I missed what you said earlier on the deposit betas Keene, but I guess, I heard the part about the – what's going to flow through the expenses.
But just as far as kind of the total beta, I guess, how do you think about a beta maybe on the first 100 versus maybe the second 100? Can you give any thought on how that progresses? I think you said last time you guys were – I think it was a 70 – the number you gave as 70 but maybe that was total, but just kind of how you progress here for the first or the immediate increases in the near term here?.
Yeah. The 75% beta I gave was on just the interest-bearing piece. I think it's pretty clear that we're in – we're within that first 25 basis point hike and we don't expect much movement there. So our view is from here on out.
I think in terms of what we would expect, obviously, we would expect deposits to react more slowly initially and then become more rate sensitive as rates move up. I think embedded in our net interest income and margin commentary is the fact that, also we get off the floors. And so I think there's a variety of offsetting factors.
So I think the betas early on are going to be lower. And then I think thereafter, we'll track closer to that 75% and then it's how aggressive do we get – not we but does the rate – do the rate increases get. But for us it's – we do expect that it's going to be more than paid for on the asset side with the sensitivity.
So again, I gave betas because I knew that's a fairly hot topic right now, but we also always try to guide people towards the net interest income and margin expansion because the beta is not the single determinant for us of what profitability is going to be.
It's really that asset sensitivity the investment portfolio opportunities we have with the amount of cash that we have yet to deploy. So we look at all those factors and we think that that gives us confidence that, we're 3% to 4% annual pickup in earnings for every 50 basis points.
And we think that's consistent for what I'll say is a foreseeable future until we speak again and have a couple more quarters under our belt..
Got you. No, that's helpful, Keene. I appreciate it. And just your comments about, I guess maybe just – I don't know for I guess who takes it. But just maybe for Scott, just kind of the loan growth all the hires you guys kind of outlined here.
Maybe just talk about does that change – does that just kind of support your existing growth outlook? Is that – and to your point Keene I guess it doesn't sound like – it sounds like from an efficiency standpoint you're going to get the benefit.
So the efficiency ratio shouldn't see that much change as a result of kind of the talent you've added here?.
Brian, this is Jim. Let me tackle that one. I would tell you, the expectation given where we're making the investments in these higher growth markets, will take us from talking about being mid to high singles to high singles to low doubles in terms of run rate growth, right? So you think about quarters further into 2022 that would be our expectation..
Okay. Perfect. And that's helpful.
And just on the efficiency side, just it seems like that's – there shouldn't be much change there just as it's going to get paid for with the additional growth you expect to put on?.
Yeah. Look Brian, I think if you go from 53 to 64, you're talking about $2 million of revenue.
I think just count alone is going to give you that expense coverage back and then the 25 basis point hike that we already have that, you didn't really see any through P&L in the first quarter, but is fully impacting the second quarter and a midstream hike here continued earning on the growth for the first quarter.
I do think that efficiency generally improves from here, but that doesn't mean it doesn't get a little bit lumpy or bouncy from first to second or third quarter, with some of the tax credit trends that I talked about. But generally, I think your point is right.
From our perspective, low rate environment, we've performed well, but this balance sheet is ready to move up and we're happy for that, and that will drive some optical gains in core efficiency ratio..
Yeah. Got you. Okay. That's it for me. I appreciate you taking the questions and congrats on a nice quarter..
Thanks, Brian. We appreciate it..
And we'll take our next question from Daniel Cardenas with Boenning & Scattergood..
Good morning, gentlemen..
Hey, good morning, Daniel..
Just a couple of quick questions here.
What's the duration on the securities portfolio? And then as we think about growth in the securities portfolio is that going to be primarily in the held-to-maturity portfolio or the available-for-sale portfolio?.
Hey, Dan this is Keene. The portfolio has extended a little bit and so it's actually pretty long. We've been heavily investing in munis over the last 1, 1.5 years. So the duration is north of six years, but we did put the bulk of those securities in held-to-maturity. So the duration on AFS is five and under.
And based on what we're buying today and the complexion of what we're buying today, we're working on shortening that duration back on the portfolio.
But again, I think optically it sounds long, but the loan portfolio duration is under three years, as we sit here so it's an asset class decision with the munis as well as an overall balance sheet discussion there in terms of the portfolio. And then please remind me what the second part of your question was..
Just in terms of kind of future expansion of the securities portfolio, is that going to be primarily done in the held-to-maturity or the available-for-sale portion?.
I would say that the composition is going to continue to be about the same. We'll put municipal purchases, probably generally in held-to-maturity as we make them. And that's about one-third or less of the portfolio from a new purchase perspective.
And then agency bullets and mortgage backs will go available-for-sale for obvious reasons and that will be around two-thirds or more of purchases.
So I think that's generally what we expect and we expect that will help drive down some of the duration of AFS in particular and the portfolio overall with the short end of the curve coming up and being more cooperative in terms of reinvestment rates..
Okay. Good. All right. Got it. Thanks. And then just one quick question on the credit quality front.
Your metrics are very strong, but just kind of given the backdrop of raising rates and inflationary pressures, are there any portions of your loan portfolio that cause you concern maybe two, three rate hikes from now?.
Dan, this is Scott. I can kind of address that. I think we've been sensitizing our analysis on our deals on rates certainly as a general practice for a while now, originations renewals, trying to incorporate that into our underwriting and our structures.
I would say looking at the portfolio on the C&I side, the impact of higher prices, the scarcity maybe of some inventory the supply chain issues, aren't really impacting C&I other than obviously access to credit or need for credit.
But generally, a strong demand in these businesses and they've been able to pass along the rising costs so far or kind of lean into the liquidity they have. But I would say we've got a particular eye on consumer discretionary goods. Those are probably going to see impacts earlier travel, leisure, luxury. Ag is another business that we're in.
We've been able to see them pass along, I think the increased input costs right now. Commodity prices are keeping up, but will they be able to maintain that pace? I think that's a question and we're watching that.
And then I think on the specialty side, life insurance premium finance may slow a bit as rates rise, if cash value of the policies don't quite keep up. I think those are the ones that probably on the forefront now..
Okay. Great. Thank you. All right. That's it for me. Thanks guys. Good quarter..
As there are no further questions at this time, I'll turn the call back for any additional or closing remarks..
Thank you, Cristina. That's really it for us today. I want to thank you for joining us this morning. Thanks for the great questions and your interest in our company and wish you the best for the remainder of this week and the remainder of the quarter. So we'll talk to you later. Thanks..
today's call. Thank you for your participation. You may now disconnect..